1961 (1) TMI 6 - SC - Income Tax

Whether on the facts and circumstances of this case Rs. 72, 963-12-0 was a revenue expenditure deductible under section 10(2)(iii) or under section 10(2)(xv) of the Indian Income-tax Act ? Whether on the facts and circumstances of this case Rs. 76, 526-1-3 was a revenue expenditure deductible under section 10(2)(iii) or under section 10(2)(xv) of the Indian Income-tax Act ? Held that - On the facts proved in the present case the trust agreed to finance the business of the appellant on the terms set out in the agreement and there is nothing to show that he could have made any better arrangements or would not have lost the contract if he had failed to enter into the agreement i.e. the agreement to pay the amounts in dispute. Therefore in a commercial sense the payments were an expenditure wholly and exclusively laid out for the purpose of the business. Therefore the High Court was in error and the question referred should have been answered in the affirmative in favour of the appellant. Appeal allowed.

Summary

Issues Involved:
1. Whether Rs. 72,963-12-0 was a revenue expenditure deductible under section 10(2)(iii) or 10(2)(xv) of the Indian Income-tax Act.
2. Whether Rs. 76,526-1-3 was a revenue expenditure deductible under section 10(2)(iii) or 10(2)(xv) of the Indian Income-tax Act.

Issue-Wise Detailed Analysis:

1. Deductibility of Rs. 72,963-12-0 as Revenue Expenditure:
The appellant entered into a contract with Bengal Nagpur Coal Co. Ltd. for raising coal and required financing, which was provided by the Mohini Thapar Charitable Trust. The trust advanced funds up to Rs. 11 lakhs under stringent conditions, including a 6% interest and 11/16th of the net profits. The appellant claimed Rs. 72,963-12-0 as deductible under section 10(2)(iii) or 10(2)(xv) of the Income-tax Act. The Income-tax Officer disallowed this, questioning the genuineness and business motivation of the agreement. The Appellate Assistant Commissioner and the Income-tax Appellate Tribunal upheld this decision, viewing the payments as a share of profits rather than business expenditure.

The Supreme Court noted that substantial sums were advanced by the trust without security, and the stringent conditions were justified by the financial risk involved. The court emphasized that the agreement's genuineness was not challenged and that the payments were commercially expedient for the business. Citing precedents like Commissioner of Income-tax v. Chandulal Keshavlal, the court highlighted that expenditure for business facilitation, even if benefiting a third party, is deductible. Therefore, the payment was considered wholly and exclusively for business purposes.

2. Deductibility of Rs. 76,526-1-3 as Revenue Expenditure:
Similar to the first issue, the appellant claimed Rs. 76,526-1-3 as deductible for the subsequent accounting year. The Tribunal and High Court viewed these payments as a share of profits due to the relationship between the parties and the nature of the agreement. They argued that the payment, alongside interest, amounted to an exorbitant rate of return, suggesting a quasi-partnership rather than a genuine business expense.

The Supreme Court disagreed, emphasizing the context of the financial arrangement and the substantial advances made by the trust. The court reiterated that the payments were necessary for securing the business contract and facilitating operations. The court referenced cases like Tata Hydro-Electric Agencies Ltd. v. Commissioner of Income-tax and British Sugar Manufacturers Ltd. v. Harris, which support the deductibility of payments made for business facilitation under commercial trading principles. The court concluded that the payments were indeed business expenditures.

Conclusion:
The Supreme Court held that both amounts, Rs. 72,963-12-0 and Rs. 76,526-1-3, were deductible as revenue expenditures under section 10(2)(xv) of the Indian Income-tax Act. The High Court's judgments were set aside, and the appeals were allowed in favor of the appellant. The appellant was awarded costs in both the Supreme Court and the High Court.